All enterprises treading in china with related-party transactions must submit "Enterprise Annual Reporting Forms for Related-Party Transactions" ("Reporting Forms") to the tax authorities together with their annual tax returns.
The Reporting Forms include nine forms:
Related Parties, Summary of Related-Party Transactions, Sales and Purchases, Services, Intangible Assets, Fixed Assets, Financing, Outbound Investment, and Outbound Payment.
We can help you review and/or prepare the annual reporting forms. Our comprehensive services are designed to help manage non-compliance risks and avoid penalties or investigations resulting from overdue related party filings. Meanwhile, our services can help enterprises promptly uncover potential non compliance issues in related-party transactions.
Enterprises that do not fall into any of the exempted categories should prepare, preserve, and, upon request of the tax authorities, submit contemporaneous documentation for each tax year.
If an enterprise fails to provide contemporaneous documentation, the tax authorities have the right to impose penalties including fines and to "deem" its taxable income by assigning profits based on their own calculations without the need to rely on specified transfer pricing methodologies.
Enterprises that fail to submit contemporaneous documentation in accordance with the provisions will be listed as "key targets" for transfer pricing investigations. When tax authorities impose transfer pricing adjustments on such enterprises, 5 percent will be added to the base interest rate applicable to the tax payment, if contemporaneous documentation is not prepared.
The tax authorities in China are using the provisions on annual related-party filings and contemporaneous documentation to implement professional and specialised tax administration on transfer pricing, mirroring the measures for monitoring and preventing tax avoidance. We expect transfer pricing investigations throughout the country to be reinforced, significantly increasing enterprises' non-compliance risks.
We can help you review and/or prepare contemporaneous documentation in accordance with the tax authorities' requirements. We can help ease the overall compliance burdens for multinational enterprises and mitigate the risks of transfer pricing investigations and adjustments due to non- compliance.
Prevailing regulations have clarified for the first time which enterprises are eligible for Advance Pricing Agreements (APAs), and confirmed that pre-filing meetings can be conducted anonymously.
The negotiation and signing of an APA will have no influence on transfer pricing investigations for either the year of application or previous years. However, the transfer pricing policies and computation methods determined in the APA can be applied to the evaluation and adjustment of related-party transactions conducted in those years if the transactions are identical or similar to those in the years to which the APA applies.
We can help you prepare and apply for APAs, and advise you before, during and after negotiation and agreement with the tax authorities. For example, we can help you select appropriate transfer pricing methodologies and critical assumptions, prepare supporting documentation for the APA application, negotiate with the tax authorities, and prepare annual reports during the APA's implementation period.
For the first time the law explicitly gives tax authorities the right to use non-public information and materials in transfer pricing investigations and adjustments. It makes clear that transfer pricing adjustments should generally be made to no lower than the median of the profit range of comparables.
The tax authorities also require enterprises with single manufacturing functions not to assume any risks or losses caused by poor managerial decisions, under-utilisation of capacity, or unmarketable products. The profit margin of these enterprises should be kept "at a certain level".
After the execution of the transfer pricing adjustments, the tax authorities will follow up with the enterprise for five years from the year after the adjustment. The enterprise is required to provide contemporaneous documentation for each of these follow-up years.
The provisions on transfer pricing investigations and adjustments reflect the strong position taken by the tax authorities on the treatment of transfer pricing disputes. Enterprises under investigation will have more challenges in managing aggressive transfer pricing investigations and adjustments.
We have extensive experience in helping clients respond to transfer pricing investigations from the tax authorities. Our diverse group includes experienced tax professionals with indepth knowledge of local legislation and economic analysis. Our professionals can discuss appropriate response strategy options; prepare robust economic analysis; negotiate with the tax authorities; and assist enterprises in pursuing legal remedies, where necessary.
An enterprise can sign a Cost Sharing Arrangement ("CSA") with its related parties on the joint development or transfer of intangible assets, or provision and receipt of group procurement and marketing services. Participants who use intangible property developed or transferred under a CSA do not need to pay royalties separately.
The costs allocated should not be deducted when computing an enterprise's taxable income if the transactions lack reasonable commercial purpose and economic substance or fail to comply with the arm's-length principle; or if the enterprise fails to report to the SAT; or fails to prepare, preserve and provide contemporaneous documentations for the CSA according to the regulations; or has an operating period shorter than 20 years after the signing of the CSA.
The provisions on CSAs mirror the trend towards international tax administration in Chinese tax authorities. They also give multinational conglomerates an opportunity to optimise the allocation of group resources and solve related tax issues in compliance with the new regulations.
We can help you design and implement CSAs, including the necessary registration of the CSA with the tax authorities. For example, we can assist you in assessing the feasibility and acceptability of a CSA; we can also assist you in designing and/or implementing an appropriate and applicable cost sharing model. While establishing and implementing the model, we will also help you discuss the CSA with the tax authorities and assist you in filing the formal application.
In another first for China, the tax authorities have introduced provisions on thin capitalisation, and have clarified the safe harbor threshold for related party debt to equity ratios.
Enterprises' lending may also be allowed to exceed the safe harbour limits if the related-party loans can be proven to be in compliance with the arm's- length principle.
In situations where a company's related party debt to equity ratio exceeds the safe harbor rate, the interest payment that exceeds the safe harbor amount may not be deductable. In order to support the deductibility of all interest expenses, we will assist you in preparing contemporaneous documentation studies to demonstrate that your financing structure and applied interest rates are consistent with the arm's length principle.
We can help you monitor and fine-tune your intercompany transactions, and recommend modifications or adjustments to your transfer pricing policies and their implementation. Through economic and financial analysis, our experienced professionals can assess whether your related- party transactions are in line with the arm's length principle and, where appropriate, we can quantify any corresponding transfer pricing risks.
We can help you create a dynamic transfer pricing strategy that is practical to implement. This planning includes providing economic analysis to support changing the current transfer pricing policy while mitigating the influence of taxation. We aim to help enterprises balance business efficiency against taxation and to mitigate, where possible, existing transfer pricing risks by modifying transfer pricing policies.
Enterprises are constantly seeking to optimise their supply chains as their operations become global. Their ability to adequately scope and manage change is a prerequisite in realising their competitive advantages. Since transfer pricing will have both direct and indirect tax implications for the whole supply chain, it is critical that the tax consequences and opportunities arising from a business change in the supply chain are included as an integral part of the change process, covering all phases from planning and feasibility analysis through to design and implementation.
We recognise the importance of aligning transfer pricing and the chosen business model of clients to deliver enhanced overall benefits. At KPMG, our transfer pricing professionals work together with a range of other tax and advisory professionals to evaluate, design and implement dynamic transfer pricing strategies that are consistent with clients' global business and operational goals.
The day-to-day implementation of transfer pricing policies is commonly a challenging area for multinational enterprises, especially where tangible-goods transactions structured around profit-based transfer-pricing methods are adopted. Service and licensing transactions may also raise hurdles, particularly where currency controls come into play. Managing intra-group transfer prices in order to comply with the arm's length principle within the practical constraints imposed by accounting systems, supply chains and numerous tax regimes requires a thorough understanding of each component and the respective interfaces. We are familiar with these challenges in China and can leverage our experience to provide you with practical, manageable operational pricing solutions, which will reflect your industry, market conditions and the jurisdictions in which you operate.
We can assist you with identifying potential intra-group restructuring options, including the preparation of robust pricing studies for relevant intra-group transfers of company shares, business segments and specific intangible assets. Our services may start with the identification of potential restructuring opportunities and extend to the documentation and defense of the proposed transaction to the tax authorities. To provide you with high quality, tailored and compliant services, we involve professionals with a strong knowledge of your industry, the factors which may affect the pricing of related party transactions and the requirements of the relevant tax administrations.
When multinationals carry out mergers and acquisitions, transfer pricing issues may influence target enterprise's fair value and the acquisition price. Transfer pricing may also affect acquirer's equity and profitability after mergers and acquisitions. Often times the acquirer will need to deal with the tax liability arising from the acquiree's transfer pricing arrangements. We will analyze the target enterprise's existing potential transfer pricing risks and solutions to mitigate these that will help enterprises increase synergy after the mergers or acquisition. It is crucial to carry this out before the deal is closed to effectively recognize the potential impact of transfer pricing on the deal structure.